Shares in GameStop fell 5% on Monday after the video-game retailer said it may sell up to $1bn (£720m) worth of stock as it tries to make the best of the 900% surge in its shares from a Reddit-driven rally this year.
The company said it would sell up to 3.5m shares and use the proceeds to speed up its shift to e-commerce in an overhaul being led by the billionaire Ryan Cohen, its biggest shareholder and a board member of GameStop. Shares in the company fell sharply in pre-market trading in New York but had recovered by mid-morning to $182.17, a fall of 5%.
“The positive story is they’ll have more money to invest in their digital revolution, and the negative story is it’s massive dilution and would likely mean the stock faces some near-term pressure,” said Thomas Hayes, chairman of private equity investor Great Hill Capital.
GameStop was at the centre of a trading frenzy in January, which lifted its valuation to as high as $34bn, as amateur investors joined ranks on online trading discussion groups including Reddit’s r/wallstreetbets to drive up stocks that hedge funds had bet against.
Other companies involved in the Reddit mania, including cinema operator AMC and airline operator American Airlines, have already sold shares to help fund their recoveries from the Covid-19 pandemic.
“A lot of interested parties have been asking when GameStop would do something like this,” said Joseph Feldman, analyst at brokerage firm Telsey Advisory Group. “The stock has remained elevated so the company is taking advantage of the access to capital.”
GameStop finally said in March it was considering expanding on a $100m share sale plan it had originally announced in December, but was unable to execute due to regulatory restrictions.
The new offering prospectus filed with the US Securities and Exchange Commission replaces the previous plan. The sale could fetch GameStop up to $670m based on Thursday’s closing price of $191.45. However, it is not obligated to stick to that price since at-the-market programs allow companies to sell stock over a prolonged period of time.
GameStop’s 3.5m shares represent about 5% of its outstanding stock, according to Refinitiv data.
Market participants expect Cohen, co-founder of the online pet-supplies retailer Chewy, to make GameStop into an e-commerce juggernaut that can challenge bigger retailers like Target, Walmart and Amazon.
The research arm of Jefferies, an investment bank acting as the sales agent for the offering, bumped its price target on GameStop stock last month to $175 from $15, citing the company’s strategic switch to online sales. The median price target of seven analysts still stands at $25, according to Refinitiv data.